In some circumstances (principally, having turnover below £150,000 on entry) traders can elect to pay over VAT not by reference to the excess of output tax charged over input tax suffered but as a percentage of turnover. The percentage varies according to the type of business. From 1 April the rules of this “Flat Rate Scheme” are amended, such that a new, higher “flat rate” of 16.5% applies if you are a “limited cost” trader. The change will significantly increase the VAT payable by “limited cost” traders and may well mean that the Flat Rate Scheme is no longer attractive to them.
So what makes you a “limited cost” trader? Essentially, failing to spend more than a de minimis amount on goods: the de minimis figure is the higher of £1,000 and 2% of turnover.
Can you get round the new rules by artificially inflating purchases of goods (perhaps setting up a subsidiary activity on eBay) to ensure the test is passed? Sadly not: purchases of certain goods do not count. In particular, goods for resale don’t count unless the “main business activity ordinarily consists of selling, leasing, letting or hiring out such goods”. “Consists” is a tricky word: what if your main business activity is providing services but in the course of doing that you habitually sell goods to your customers (think tutors habitually providing text books to their students, for example). We think that “consists” in this context probably means “encompasses”, so that sale of goods as an integral part of a service must be OK: but in marginal cases it may be worth seeking confirmation from HMRC.
Other exclusions are
- food or beverages for consumption by you or your employees
- capital expenditure goods
- goods for disposal as promotional items, gifts or donations
- vehicles, vehicle parts and fuel except where your business is “Transport or storage, including couriers, freight, removals and taxis” and you own or lease a vehicle for that business.
This last one is potentially a problem for self-employed mechanics. Bizarrely, expenditure on purchase of vehicle parts is taken into account for the de minimis test if you are a transport or storage business, but not if you are a vehicle repair business.
For more on the Flat Rate changes, please get in touch with your usual BKL contact use our enquiry form.